Skip to content
BY 4.0 license Open Access Published by De Gruyter Open Access June 25, 2012

Fund Managers—Why the Best Might Be the Worst: On the Evolutionary Vigor of Risk-Seeking Behavior

Björn-Christopher Witte EMAIL logo
From the journal Economics


This article explores the influence of competitive conditions on the evolutionary fitness of different risk preferences. As a practical example, the professional competition between fund managers is considered. To explore how different settings of competition parameters, the exclusion rate and the exclusion interval, affect individual investment behavior, an evolutionary model is developed. Using a simple genetic algorithm, two attributes of virtual fund managers evolve: the share of capital invested in a risky asset and the amount of excessive risk accepted, where a positive value of the latter parameter points to an inefficient investment portfolio. The simulation experiments illustrate that the influence of competitive conditions on investment behavior and attitudes towards risk is significant. What is alarming is that intense competitive pressure generates risk-seeking behavior and undermines the predominance of the most skilled. In these conditions, evolution does not necessarily select managers with efficient portfolios. These results underline the institutional need for the creation of a competitive framework in which risk-taking does not provide an evolutionary advantage per se, and indicate measures on how to achieve this.

JEL Classification: C73; D81; G11; G24


Allais,. M. (1953). Le comportement de l’homme rationnel devant le risque: Critique des postulats et axiomes de l’école Américaine. Econometrica 21: 503–546. in Google Scholar

Amir, R., Evstigneev, I.V., Hens, T., and Schenk-Hoppé K. R. (2005). Market selection and survival of investment strategies. Mathematical Econonomics 41: 105–122. in Google Scholar

Arrow, K. J. (1971). Essays In the theory of risk-bearing. Chicago: Markham.Search in Google Scholar

Blume, L., and Easley, D. (1992). Evolution and market behavior. Journal of Economic Theory 58: 9–40. in Google Scholar

Blume, L., and Easley, D. (2006). If you’re so smart, why aren’t you rich? Belief selection in complete and incomplete markets. Econometrica 74: 929–966. in Google Scholar

Brealey, R. A., and Myers, S. C. (2003). Capital investment and valuation. New York: McGraw-Hill.Search in Google Scholar

Brock, W. A., and Hommes, C. H. (1998). Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22: 1235–1274. in Google Scholar

Chevalier, J., and Ellison, G. (1999a). Are some mutual fund managers better than others? Cross-sectional patterns in behavior and performance. Journal of Finance 54: 875–899. in Google Scholar

Chevalier, J., and Ellison, G. (1999b). Career concerns of mutual fund managers. Quarterly Journal of Economics 114: 389–432. in Google Scholar

Dekel, E., Scotchmer, S. (1992). On the evolution of optimizing behavior. Journal of Economic Theory 57: 392–406. in Google Scholar

DeLong, J. B., Shleifer, A., Summers, L. H., and Waldmann, R. J. (1990). Positive feedback investment strategies and destabilizing rational speculation. Journal of Finance 45: 379–395. in Google Scholar

DeLong, J. B., Shleifer, A., Summers, L. H., and Waldmann, R. J. (1991). The survival of noise traders in financial markets. Journal of Business 64: 1–19. in Google Scholar

Diamond, D., Dybvig, P. (1986). Banking theory, deposit insurance, and bank regulation. The Journal of Business 59: 55–68. in Google Scholar

Evstigneev, I. V., Hens, T., and Schenk-Hoppé, K. R. (2002). Market selection of financial trading strategies: Global stability. Mathematical Finance 12: 329–340. in Google Scholar

Farrell, M. J. (1970). Some elementary selection processes in economics. Review of Economic Studies 37: 305–319. in Google Scholar

Friedman, M. (1953). The methodology of positive economics. In: M. Friedman, Essays in positive economics, Chicago: University of Chicago Press.Search in Google Scholar

Friedman, M., Savage, L. J. (1948). The utility analysis of choices involving risk. Journal of Political Economy 56: 279–304. in Google Scholar

Gabaix, X. (2009). Power laws in economics and finance. Annual Review of Economics 1: 255–294. in Google Scholar

Golec, J. H. (1996). The effects of mutual fund manager’s characteristics on their portfolio performance, risk and fees. Financial Services Review 5: 133–147. in Google Scholar

Hauser, F., and Kaempff, B. (2011). Evolution of Trading Strategies in a Market with Heterogeneously Informed Agents. Journal of Evolutionary Economics, : 1–33. in Google Scholar

Holland, J. H. (1975). Adaption in natural and artificial systems. Ann Arbor: University of Michigan Press.Search in Google Scholar

Hommes, C. H. (2001). Financial markets as nonlinear adaptive evolutionary systems. Quantitative Finance 1: 149–167. in Google Scholar

Jones, O. D. (2001). The Evolution of Irrationality. Jurimetrics 41: 289–318. in Google Scholar

Kahneman, D., and Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica 47: 263–291. in Google Scholar

Kareken, J. H., Wallace, N. (1978). Deposit insurance and bank regulation: A partial equilibrium. The Journal of Business 51: 413–438. in Google Scholar

Khorana, A. (1996). Top management turnover: An empirical investigation of mutual fund managers. Journal of Financial Economics 40: 403–427. in Google Scholar

LeBaron, B. et al. (1999). The time series properties of an artificial stock market. Journal of Economic Dynamics and Control 23: 1487–1516. in Google Scholar

Lensberg, T. (1999). Investment behavior under Knightian uncertainty: An evolutionary approach. Journal of Economic Dynamics and Control 23: 1587–1604. in Google Scholar

Lensberg, T, and Schenk-Hoppe, K. R. (2007). On the evolution of investment strategies and the Kelly rule: A Darwinian approach. Review of Finance 11: 25–50. in Google Scholar

Letteau, M. (1997). Explaining the facts with adaptive agents: The case of mutual fund flows. Journal of Economic Dynamics and Control, 21: 1117–1147. in Google Scholar

Mallone, S. W. (2011). Sovereign indebtedness, default, and gambling for redemption. Oxford Economic Papers 63: 331–354. in Google Scholar

Markowitz, H. M. (1952). Portfolio selection. Journal of Finance 7: 77–91. in Google Scholar

Markowitz, H. M. (1959). Portfolio selection: Efficient diversification of investments. New York: John Wiley.Search in Google Scholar

Neely, C., Weller, P., and Dittmar, R. (1997). Is technical analysis in the foreign exchange market profitable? A genetic programming approach. Journal of Financial Quantitative Analysis 32: 405–426. in Google Scholar

Potvin, J.-Y., Soriano, P., and Vallée, M. (2004). Generating trading rules on the stock markets with genetic programming. Computers & Operations Research 31: 1033–1047. in Google Scholar

Robson, A. J. (1992). Status, the distribution of wealth, private and social attitudes to risk. Econometrica 60: 837–857. in Google Scholar

Robson, A. J. (1996). The Evolution of attitudes towards risk: Lottery tickets and relative wealth. Games and Economic Behavior 14, 190–207. in Google Scholar

Rosser J. B. Jr. (2009). Handbook of research on complexity. Cheltenham: Edward Elgar.Search in Google Scholar

Rubin, P. H., Paul Il, C.W. (1979). An evolutionary model of taste for risk. Economic Inquiry 17: 585–597. in Google Scholar

Safarzyńska K., and van den Bergh J. (2010). Evolutionary models in economics: A survey of methods and building blocks. Journal of Evolutionary Economics 20: 329–373. in Google Scholar

Sandroni, A. (2000). Do markets favor agents able to make accurate predictions? Econometrica 68: 1303–1341. in Google Scholar

Schaffer, M. E. (1989). Are profit maximisers the best survivors? A Darwinian model of economic natural selection. Journal of Economic Behavior and Organization 12 :29–45. in Google Scholar

Szpiro, G. (1997). The emergence of risk aversion. Complexity 2: 31–39.;2-3/abstract10.1002/(SICI)1099-0526(199703/04)2:4<31::AID-CPLX8>3.0.CO;2-3Search in Google Scholar

Taleb, N. N. (2001). Fooled by Randomness. Munich: Random House.Search in Google Scholar

Tesfatsion, L., and Judd, K. (2006). Handbook of computational economics: Agent-based computational economics. Amsterdam: North-Holland.Search in Google Scholar

Weibull, J. W. (1997). Evolutionary game theory. MIT Press, Cambridge MA.Search in Google Scholar

Published Online: 2012-06-25
Published in Print: 2012-12-01

© 2012 Björn-Christopher Witte, published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Downloaded on 27.1.2023 from
Scroll Up Arrow